Private Property, Public Benefit

New York’s rent regulations have produced all sorts of strange ways to think about real estate. So while a recent court decision does not necessarily make the city’s housing market better in any way, it at least makes a formerly implicit result an explicit one.

The case, as reported by Bloomberg, concerned a New York woman who filed for bankruptcy in 2012. A federal judge determined that the value of the lease for her rent-regulated apartment was part of the bankruptcy estate, and thus the landlord could buy the lease from the trustee. The landlord had previously sought to buy out the tenant, who was not interested.

The tenant appealed to the Manhattan-based Second Circuit Court of Appeals. The federal appeals court, in turn, asked the New York Court of Appeals (the state’s highest court) to weigh in on whether tenant privileges under rent regulations are assets subject to bankruptcy proceedings.

The state court concluded last November that they are not, and that a bankruptcy trustee is not allowed to sell them. This decision was adopted in the Second Circuit’s ruling last week, which stated that “a below-market lease is exempt from creditor claims as a public benefit.”

Think about that. Rent-regulated apartments in New York are owned by private parties, but the right to live in them is now considered a “public benefit” afforded by the state - which has never bothered to take the step of actually paying for what it bestows on some of its luckier citizens.

Opponents of New York’s rent regulations, which have been on the books in various forms since 1947, have contended in the past that the rules amount to a taking of private property without compensation. Previously the state resisted this characterization. But now the state is arguing on public policy grounds that a tenant’s right to lifetime renewals of a rent-stabilized apartment lease, along with the right to pass that lease to members of the tenant’s household, is in fact a benefit being conferred by the government. The state court called rent-stabilization rights a form of public assistance, and the Second Circuit followed suit in characterizing them that way.

This, of course, is what New York property owners have known all along. But in this particular case, the real loser is not the tenant’s landlord, who at least understood the deal when he bought the property and offered it for rent. Despite the argument of the Rent Stabilization Association of New York City Inc., a landlord group that called the state court’s decision a “radical interpretation,” it is effectively business as usual for landlords shackled by rent restrictions. The real losers are the tenant’s other creditors, who are required to absorb a loss due to the tenant’s bankruptcy because the landlord is not permitted to buy out the tenant’s lease and thus make the creditors whole. In that respect, too, New York confers benefits to tenants at the expense of private parties: in this case, various creditors.

“Public benefit” thus joins “housing emergency” on the list of phrases that mean something substantially different in the context of New York than they do in the rest of the country. Rent stabilization may indeed benefit individual members of the public - but the state has no part in providing it other than enforcing the laws that require private property holders to offer the “public” benefit to tenants. Elected officials love to confer public benefits that don’t require them to raise taxes or approve a budget line-item.

All of which goes to explain why the 1947 rent regulations and those that followed remain a political if not a practical necessity. It is the reason nobody wants to build rental housing for New York’s masses when that housing is commandeered by the state to provide a benefit for tenants at landlords’ expense. And it is the reason a “housing emergency” that was born out of the Great Depression’s construction slowdown and then the return of World War II veterans to the city’s tenements continues to this very day.

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